Temporary Hit to Capital Ratios

Temporary Hit to Capital Ratios

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...and They’d do it Again.

This week we will take a look at how some community banks have been helping their neighbors and communities during the past year. In some cases, that help has come at the expense of the bank’s capital ratios, but as you’ll see, it’s temporary.

At the end of 2019, 4-Star First Secure B&TC, Palos Hills, IL reported total assets of just under $190 million and deposits under $176 million. Its leverage capital ratio (CR) was 9.69%, loan quality was good and it was profitable.

Twelve months and a pandemic later, this small community bank is bursting at the seams. After granting nearly 1,000 Paycheck Protection Program (PPP) loans to local businesses, First Secure B&TC saw its asset size double. At the close of 2020, PPP loans accounted for 40% of total loans. If handled properly, these loans will be forgiven causing no harm to either the lender or the borrower, and we have every reason to believe that will be the case.

Deposits at this bank also jumped, increasing 42% since the end of March. Unlike PPP, which will be off the books (i.e. forgiven) in short order, we can’t be so certain about the deposits. While many Americans used their stimulus money to pay for groceries and living expenses, and some used the money to pay down debt, a number of people parked it in the bank in case of emergency.

This makes perfect sense from the consumer perspective, but it is causing the banks to witness steep declines in their leverage capital ratio. In the case of First Secure B&T, the leverage CR was well over 9% until June 30th, 2020, when it dropped to 7.6%. It has improved slightly since then, and we expect to see continued improvement.

We have a list of community banks that are in a similar situation on page 7. In each case, deposits grew more than 23% in the nine months between March 31 and December 31, 2020. As a result the leverage capital ratios dropped from above 9% to below 8% during that nine-month period.

4-Star Five-Star Bank, Sacramento, CA, the first bank listed on page 7, has made its impact in other ways besides PPP. Its employees have a longstanding commitment to the community’s most vulnerable. And it shows. While its 1,124 PPP loans helped businesses in low and moderate income neighborhoods to survive as well as a number of local nonprofits, that is not what it is most proud of.

CEO James Beckwith states, “we value the intrinsic reward of servings others”. Through sponsorships, grants, mentorships and volunteering, Five-Star Bank has made a name for itself in and around the Sacramento area.

Jim Milroy, President and CEO of 4-Star 1st State Bank, Saginaw, MI, was right on the money in his 2020 report to shareholders. Here are some excerpts:

“It will take years to fully appreciate the impact of the Covid-19 pandemic….

unprecedented growth with the PPP adding $86 million of 1% interest rate loans…

high levels of deposits due to uncertainty…

levels of mortgage originations previously unimaginable.

PPP loans at 1st State Bank represented one quarter (25.15%) of total loans at year-end 2020 and despite the challenges, 1st State Bank’s leverage capital ratio is already back up to 7.90% at 12/31; we would not be surprised to see it exceed 8% when we see its March 2021 data.

Knowing they are taking a temporary hit to their bank’s own capital ratios, they put their money and their energy where it will do the most good, back into the community. When the community thrives, the community bank thrives and the opposite is also true. Given the choice, they would do it again.

That’s not true for big banks. Some big banks have reportedly been encouraging customers to take deposits out of the safety of FDIC-insured accounts and put them into money market accounts, (namely JPMorgan Chase and Citibank). Community banks are mindful of the deposit levels, but we’ve never heard of a community bank doing that. That’s because community banks care about their customers’ bottom line as much as their own. These community banks are proving it every day.

And while we’ve named just a few examples, there is probably one near you that is similarly involved in helping your community.
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